Over the last 20 years, the growth of digital assets has exploded. Almost everyone has a social media account of some kind, and photographs and music are almost all stored in digital form. Further, digital art is starting to be created, stored and sold online. While there are certain challenges to estate planning for these assets, one can take steps to make sure they are properly transferred to your desired beneficiaries upon your death.
A more difficult estate planning issue for digital assets lies in the form of cryptocurrency, which has also exploded in use in recent years. The most notable cryptocurrency is Bitcoin, which has a market capitalization of upwards of $3.5 billion. (For the sake of accuracy, “bitcoin” is the name of the payment system as well as the unit of currency involved.)
What makes estate planning for bitcoin difficult for estate planning attorneys is that many do not even understand what bitcoin is or how it works. That’s a challenging first, but perhaps not the most difficult, step. You can try to get an understanding by reading Bitcoin’s Wikipedia page for a primer, but you’ll most likely have to do much more additional research and reading. This is an area with which estate planning attorneys must educate themselves in the near future as individuals have accumulated several million dollars’ worth of bitcoins.
However, once you do understand what Bitcoin is and how it works, you’ll quickly realize that there’s currently no easy way to plan for the transfer of bitcoins upon your death.
The first estate planning problem is that bitcoins can be stored in a number of different ways and that method could be lost or unknown. To summarize in layman’s terms: if you are the “owner” of bitcoins, you hold private keys for those bitcoins – think digital strings of code – which are needed to match public keys, in order to spend/transfer those bitcoins. If you lose your private keys, those bitcoins are also lost forever. Because ownership of bitcoin is anonymous and untraceable (for the time being), it’s like losing cash. Many people store the keys on a computer (sometimes using a digital wallet). For security reasons, sometimes people store them on a hard drive disconnected from the internet. Others print the code out on paper and put them in safety deposit boxes or engrave them onto jewelry. Regardless of your storage method, how are your heirs supposed to know a) if you even owned bitcoins, b) how you stored them, and c) where to look? They can easily be lost or neglected during the estate settlement process. Case in point: someone once threw away a hard drive storing $7.5 million worth of bitcoins.
This leads to our second estate planning problem: bitcoins aren’t titled in anyone’s name. A big reason for its early adoption by the internet-savvy is the ability to make transactions anonymously (there are several stories regarding the use of bitcoins as payment for hitmen to carry out murders). Again, think of bitcoin as digital cash. Cash can be deposited into a bank or brokerage account, which can have beneficiary designations and be titled in the name of your revocable trust. However, bitcoin does not really have the equivalent. While there are “bitcoin exchanges” which act as a marketplace/conduit for converting your bitcoins to “real” money, and you can store your bitcoins on those exchanges, many owners do not do so long-term because, again, security is a major issue. The exchanges also do not currently allow titling in the name of a trust. So, as it stands, upon your death, your bitcoins may have to go through probate, an onerous process in certain states, such as California.
Even pre-death planning for bitcoin holders has additional considerations: do powers of attorney cover cryptocurrency? Another issue on which the IRS has provided guidance but is not altogether resolved is the tax treatment of bitcoin.
Practitioners should also understand the Uniform Fiduciary Access to Digital Assets Act (UFADAA) enacted in 2014. The UFADAA has laws covering fiduciary authority over digital assets, a Court’s authority over digital assets, a personal representative’s authority over digital assets, a Trustee’s authority over digital assets, and the like. Notably, the UFADAA determined that a Trustee does have fiduciary authority over digital assets held by a trust but does not provide guidance on how to transfer such assets to the Trust. Practitioners may want to add specific trustee powers provisions or entire articles determined to digital assets in their sample forms in light of the provisions of the UFADAA. See our blog post about the UFADAA here.
In the current digital landscape, there aren’t any easy solutions to incorporate cryptocurrency and/or digital assets into the fold of the traditional estate planning/trust blanket. However, these are matters which estate planning attorneys should monitor carefully as the digital finance and asset world develops and start asking clients about any digital finance and assets they may have.